There's an interesting trend in the Home Loan crisis. Over the last year several states have set up "Borrower Funds" to assist Home buyers from defaulting on balloon mortgages.
What's surprising is that few, if any borrowers are utilizing these programs.
In Maryland so few people have applied to the State's Mortgage rescue program that they are considering shutting down the program. In Massachusetts not a single homeowner has taken advantage of refinancing their home.
With hundreds of millions of dollars available to distressed Mortgage holders, why aren't they being taken advantage of?
The Boston Globe reports some of the reasons are:
The vast majority of the applicants aren't eligible for refinancing. They have either fallen too far behind on their payments, have badly damaged credit, or simply owe more on their loans than the value of their homes, making refinancing effectively impossible.
A critical part of these programs is the assumption that a lender will accept a write-down of the original mortgage. For instance, if a borrower has a home originally valued at $400K, they could refinance the home at today's value or $350K. The idea here is that the lender would rather take a haircut for $50K, rather than have the mortgage go into default (and lose even more $).
So why aren't Lenders signing off on State-secured refinances? Two words - Hostage value. What's Hostage value? From the Credit Slips blog page:
A side note for the Not-Commercial-Law-Jocks: "Hostage value" in secured lending refers to the ability of a secured lender to extract a payment in excess of the value of the collateral from a borrower by threatening to reposses the collateral. The classic example was the old practice of taking a security interest in all of a family's household goods, which might add up to a resale value of $2000, then demanding that every penny (plus interest) of a $10,000 loan be repaid before the security interest would be released. This version of the practice involving household goods is now banned by the FTC. In bankruptcy law, undersecured claims would be bifurcated into its secured ($2000) and unsecured ($8000) portions (see Bob Lawless's recent post).
Rescue programs limit their payouts to 100% of the value of the property, which makes sense both to protect the fund and not to reward the mortgage lenders by paying them more than they could get for the house if the family gave it back to the lender. But the mortgage lenders want more. If they don't get it, they won't release the mortgage--even though the lenders won't get anything close to 100% of the value of the home if they are forced to foreclose. They hold the home hostage: Pay the amount the mortgage company wants or move out of the house. Some families will find the money to pay, and others will lose their home.
The mortgage lenders are counting on the leverage of their hostage taking to do better than 100% payment. So long as they hang on. rescue efforts are irrelevant and renegotiation won't work.
So rather than refinance, Lenders are in reality holding Consumers hostage by threatening repossession, forcing Consumers to continue unsustainable payment plans.